TDS – 194K
A summary of Section 194k
This post will cover Section 194K—Tax Deduction on Dividend Income from Mutual Fund Units.
Let’s look at each section in more detail:
What is Section 194K?
Introduced in 2020, through Section 194K, The old Section 10(35) related to exemption on income from mutual funds was withdrawn and shifted to the new section with new clauses. under Section 194K, an entity will be responsible for tax deduction when payment is made to a resident for :
- Units of mutual fund (under Section 10(23D)),
- Units from the administrator, or
- Units from a particular company,
This was to eliminate the double tax applied due to the previous law. This deduction should be made when the income or payment is credited, whichever occurs first.
When income credited to an account exceeds ₹5,000 in an FY, a 10% TDS (Tax Deducted at Source) must be deducted. If the resident’s PAN is unavailable, then a 20% tax will be deducted.
Types of Income from Mutual Funds Units
Dividend
Previously, fund houses (Asset Management Companies) paid dividend tax (DDT) on behalf of the investors. However, the Budget 2020 eliminated DDT. From FY 2020-21 onwards, dividend income is taxable in the hands of the recipient/investor.
Despite these changes, Section 194K of the Finance Act 2021 requires mutual funds to deduct TDS on dividends exceeding ₹5,000 for unitholders. This shows the authorities are committed to regulating the taxes on dividend income in mutual funds.
Capital Gains
Under current income tax rules, capital gains are taxed in the hands of the taxpayer. Long-term capital gains from equity-oriented mutual funds are taxed at 10% if they reach ₹1 lakh per year. Short-term capital gains from equity-oriented mutual funds are subject to Securities Transaction Tax (STT) and are taxed at 15%.
However, Section 194K of the Finance Act 2021 doesn’t require mutual funds to withhold TDS on capital gains arising from unitholder redemptions. The authorities’ decision ensures a streamlined and transparent approach to taxing capital gains from mutual funds.
Exceptions of Section 194K
TDS under Section 194K does not have to be deducted in the following cases:
- Dividend income of up to Rs 5,000 in a financial year is exempt from deducting tax under Section 194K at the source.
- Capital gains are also exempt from Section 194K.
- No deduction is needed if the contract payment is at most Rs 30,000.
Rate of Section 194K
The TDS rate under Section 194K is 10%. After deduction, it will be recorded in Form 26AS. If the actual tax payable is less than what was deducted or no tax is owed, investors can file an income tax return to claim a refund.
If the investor supplies their PAN, the 10% rate applies. Without a PAN, the TDS rate increases to 20%. However, higher TDS rates are unusual because presenting a PAN is necessary to open a mutual fund account.
Penalties For Non-Compliance Of Section 194K
Section 194K requires all dividend distributions from mutual fund schemes to follow its rules. Interest and penalties will apply if TDS (Tax Deducted at Source) is unpaid or not deducted. The details are as follows:
- If TDS is not deducted, interest at 1% per month will be charged from the date the tax was supposed to be deducted until it is deducted.
- If TDS is not paid after deducted, interest of 1.5% per month will be charged from the date the tax was deducted until it is paid to the government.
- If TDS is not paid or deducted, a penalty under Section 271C will apply. This penalty will be equivalent to the amount of TDS not withheld or paid.
- Also, expenses will only be allowed under section 40(a)(ia) if TDS is deducted and paid.
Conclusion
Many people believe that mutual funds are an excellent investment. New and experienced investors have used them for years to save money on taxes while earning high profits. However, understanding the tax rules is vital for avoiding penalties.
Mutual fund dividends are now taxed under Section 194K. If you earn more than ₹5000 in dividends per financial year, a 10% TDS will be deducted. However, capital gains on the sale of mutual fund units are not subject to TDS.
We have completed our blog post about Section 194K of the Income Tax Act. If you have any further questions or concerns, please share them in the comments space.
FAQs
1. What is the TDS rate under Section 194K for mutual funds?
Ans: If a mutual fund’s dividend payment exceeds Rs 5,000 during the financial year, the applicable TDS rate under Section 194K is 10%.
2. Can investors claim the TDS deduction under Section 194K for Mutual Funds as a tax credit?
Ans: Yes, investors can claim TDS deducted under Section 194K as a tax credit when filing their income tax returns, decreasing the total taxes they pay.
3. What is the Securities Transaction Tax?
Ans: The government charges a 0.001% Securities Transaction Tax (STT) on purchasing or selling mutual fund units in an equity or hybrid equity fund. No STT is applied to debt fund units.
